CITY HIGHLIGHT, DECEMBER 2008

CLEVELAND CITY HIGHLIGHTS
Joseph Martanovic, Kevin Kuczynski, Barry Holtzer, Christopher Hondlik and Michael Glass

Cleveland Retail Market

Currently, the Cleveland retail sector is dealing with growing vacancy rates, which have been exacerbated by the exit of Circuit City and Linens ‘n Things from the market. There is no rush from other users to fill the available space, as the majority of the players are confined to the sidelines, waiting for the turmoil in the credit markets to abide. Without the ability to secure financing, development activity is slowing. Downtown has lost some momentum recently, as the long in-development Flats endeavor has halted due to the loss of the project’s developer (see sidebar below).

Rental rates are decreasing as well. “The days of the $40 or $50 per square foot rents for small strip centers are gone,” says Drew Sulzer, vice president of Beachwood, Ohio-based Reisenfeld & Company. “Those anchors — Starbucks and Blockbuster — aren’t adding stores. Rents have and will continue to come down.”

Many retailers simply aren’t able to afford the rents that were established during the boom experienced 3 to 4 years ago.

“Prices have come down, and retailers know it,” Sulzer says. “Landlords need to make deals, and it is going to be an interesting battle between owners and potential tenants looking for discounts on rent.”

A silver lining for some brokerage firms in the current market is disposition activity.

“There is currently some activity in the disposition market, but rents have come way down,” Sulzer explains. “Potential buyers are in the driver’s seat. We expect in 2009 that we will get disposition work.”

After the holiday season, Sulzer believes the retail market will get a handle on the current state of affairs in the economy and begin to move on.

“There will be an evolution in the near future of new retailers picking up the pace with new concepts to fill the void,” he explains. “I think some of the existing tenants are dealing with too many problems, too many expenses. I see a shake up occurring in the future, with new retailers coming into the market to fill these vacancies.”

Along with the retailers, many developers are looking to the financial market for signs of life. The most pressing issue in the quest to catalyze the commercial real estate industry is the lack of lending activity. Once the banks begin freeing up money and allowing credit lines to be developed, there will be renewed confidence and the retail sector will slowly crank back up.

“Cleveland is still a good, viable market, with a good population and good income,” Sulzer says. “It is just a matter of getting out of these doldrums and moving on to the next step. I think there will be a wave of retailers in late 2009. There will be retailers doing deals, but it may be different types of retailers filling up spaces. You have to think outside of the box in this market; you have to consider charter schools, daycare centers and medical-type users.”

— Kevin Jeselnik

Plaza At Southpark lands anchors

Pepper Pike, Ohio-based Visconsi Companies has signed the anchor tenants for Plaza at SouthPark, which is a new retail center underway at Interstate 71 and State Route 82 in Strongsville, Ohio. The co-venture, for which Visconsi has teamed with Aveni-Miller, will be anchored by a 147,000-square-foot Costco, a 26,000-square-foot Bed, Bath & Beyond, and a 45,000-square-foot Best Buy.

The endeavor broke ground this summer, with store openings planned for fall of next year. Located across from Westfield SouthPark Mall in the  southern Cleveland suburb, Plaza at SouthPark boasts access from Howe Road, as well as S.R. 82.

Visconsi has held a majority of the 30-acre site since 1995, and has completed extensive site work and environmental enhancements in preparation for the current development.

Flats East Bank on Hold

The $522 million effort to redevelop Cleveland’s Flats entertainment district along the banks of the Cuyahoga River has been put on hold. The developers of the Flats East Bank project, The Wolstein Group and Fairmount Properties, have put it on hold, citing the difficulties of landing public and price financing in the face of the current credit crisis.

There is still the need for public improvements and environmental remediation in the areas of the development that were previously used for industrial purposes. The costs incurred while working on public improvements, coupled with the difficulty in getting public funding, has lead the team to suspend the development, though it remains committed to completing the endeavor, and expects to resume activity when private financing is in place and the economy stabilizes.

In the past, the site was home to various nightclubs, as well as an industrial district. Existing building have been demolished for the development of a mixed-use community featuring residential, office, retail and restaurant uses.

In a statement released by the developers, Scott Wolstein says, ““Private construction wasn’t scheduled to commence for several months. We are hopeful that markets will return to some level of normalcy in the near future and that we’ll finalize the remaining private financing in advance of when it’s needed. We look forward to working with the public agencies to keep this project on track.”

Cleveland Industrial Market

Despite the recent cascade of bad economic news, Cleveland’s industrial market is still a stronghold for developers, manufacturers and distributors. As the nation’s ninth-largest industrial market, Cleveland is weathering Wall Street’s woes due to activity — retrofitting, redeveloping, construction — among some of its more robust industrial anchors. But the Northeast Ohio market is coping, much like the rest of the country, with the help of perennial development juggernauts such as Premier Development Partners, Geis Companies and Industrial Realty Group (IRG).

Market activity continues to follow last year’s trends, particularly in the eastern submarket due to its freeway accessibility, pockets of developable land and the pro-business policies of its communities. Approximately 1 million square feet of state-of-the-art warehouse space has come online within the last 12 months, of which 40 percent has been absorbed. In 2007, Weston Solutions and The Geis Companies collaborated to buy 212 acres in the Village of Glenwillow, Ohio, which resulted in the delivery of one speculative building totaling 400,000 square feet; however, the space remains vacant, as development across the region slogs through quarter four.

In reassessing their operations, some customers are looking for good bulk and high-bay warehouses in the area, as distributors look to open small locations to cut transportation costs. The decrease in overall rental rates for industrial and flex space from this time last year should placate the market’s slump, and hopefully invite industry to the area.

Served by freeways, good infrastructure and a business-minded municipal government, Solon, Ohio, which borders Glenwillow to the east, boasts a large supply of industrial space. South of Solon in Hudson, Ohio, a 1.25 million-square foot, five-building distribution complex formerly owned by Little Tikes is ripe for investment and development.

To the west, in Lorain County, Ohio, IRG is renovating the former Ford plant and has already leased about one quarter of 1 million square feet within the reconfigured property. And in Cleveland, the Graystone Properties-owned Tyler Village, a marquee 1 million-square-foot former industrial park on the near east side of the CBD, is getting a mixed-use build out and conversion to office space.

Northeast Ohio’s vacancy rate at the close of the third quarter registered at 7.56 percent. Although there was no change from the previous quarter, the year-over-year statistics suggest a strong local market compared to the third quarters of 2007 and 2006, where vacancy stood at 8.28 and 9 percent, respectively, according to Colliers Ostendorf-Morris’ market analysis. Rental rates held steady at $3.79 per square
foot, compared to $3.78 in the second quarter and down from $3.94 this time last year. Pure industrial space increased slightly to $3.55 per square foot, while flex rates, which represent only a small percentage of the total industrial market, endured a slight decrease to $8.31 per square foot.

Aside from development potential in the southeast submarket and the oases of restoration across the region, the Akron-Canton area in Summit County, Ohio, is proving to be a viable nexus for future growth. The $2.9 million sale of an 88,400-square-foot property at 3833 Mogadore Industrial Parkway, along with IRG’s $900-million, 500-acre redevelopment of Goodyear’s current headquarters have rallied activity. Goodyear is subleasing 120,000 square feet within a 350,000-square-foot facility to Canton-based Suarez Corporate Industries. Much to the market’s delight, there’s no indication that the growth is going to let up anytime soon.

— Joseph Martanovic, senior vice president, Kevin Kuczynski, senior vice president, Barry Holtzer, vice president, and Christopher Hondlik, vice president, all work at Colliers Ostendorf-Morris in Cleveland.

FOGG RECEIVES GRANT FOR EUCLID INDUSTRIAL PARK

The state of Ohio has awarded a Job Ready Sites grant to Ray Fogg Building Methods for the development of Euclid Industrial Park in Euclid, Ohio. The proposed park spans 80 acres of the former PMX plant.

The urban redevelopment, which is located at the E260th Street exit of Interstate 90, will be served by CSX and Norfolk & Southern railroads. The park could accommodate up to 1.3 million square feet of new construction. Demolition and remediation will begin early next year, and the park will be ready for development by summer.

Cleveland Multifamily Market

Despite the current economic climate Cleveland’s apartment market is set for a strong performance in 2009.

The latest woes on Wall Street and throughout the global financial system have exacerbated the credit crunch, further limiting the availability of credit to Cleveland’s private and institutional real estate investors, businesses and consumers, which in turn will hinder spending. Lower-rated companies are facing much greater difficulty securing short-term funding, while highly rated corporations have experienced a run-up in borrowing costs.

The effects of the nationwide credit crunch and housing downturn have gradually trickled into Cleveland’s economy, though healthy projections should support the metro area in the long term. Limited new inventory and lingering uncertainty in the housing market will translate into continued improvement for Cleveland’s apartment properties, despite softness in the employment market. Housing prices are down more than 15 percent year-over-year through the third quarter, due primarily to persistent foreclosure activity. While housing market weakness and tighter mortgage markets are keeping more residents in the renter pool, supply of new units remains in check. Additions to inventory will continue to be muted this year at just 0.2 percent of existing stock. As a result, occupancy will stay tight throughout the metro area, near 95 percent for most submarkets, with certain areas expected to perform even better. Ongoing renter demand for affordable Class B and C properties in the Strongsville/Berea and Parma/Independence, Ohio, submarkets will keep vacancy low, leading to healthy revenue growth.

By the numbers, area employers are expected to shed 3,000 positions this year, a decrease of 0.3 percent. In 2007, total local employment fell 0.4 percent; however, the educational and health services sector is expected to add 1,700 jobs by the end of the year, up 1 percent from last year.

Approximately 270 apartment units will have come online by the end of the year, compared with 260 units in 2007. During the past 5 years, completions have averaged 450 units annually. Instability in the housing market continues to support apartment fundamentals, as many residents are hesitant to purchase homes. With new supply limited, vacancy is forecast to decline 20 basis points by year end to 5.4 percent. Asking rents are expected to rise 3.4 percent to $753 per month this year, while effective rents are expected to increase 3.4 percent to $718 per month. Rent growth in Class A properties will remain strong due to forecasts for minimal new competition.

The outlook for the Cleveland investment market remains fairly bright, although velocity may stabilize into 2009, as owners are still unwilling to discount prices, despite more conservative investor expectations. During the past year, cap rates have averaged in the low- to mid-8 percent range. Despite expectations for fairly strong operational performance in the near term, tighter lending may cause cap rates to tick up slightly through the next year. Certain areas remain positioned for above-average performance; nearly $5 billion in redevelopment efforts in the University Circle area points to long-term opportunities. Occupancy levels are elevated for top-tier properties in the submarket, while vacancy in the area’s Class B and C apartment units is nearly 300 basis points higher, approaching 6 percent. However, capital improvements could capture added value through tighter occupancy and higher rents.

Despite current economic woes, Cleveland remains one of the healthiest multifamily markets in the United States. Rental rates continue to rise, property values continue to increase, cap rates are low compared to other regions of the country and the federal government’s bailout of the GSEs should bring more stability to the market. In the long term, expect the Cleveland apartment sector to record substantial gains, driven by solid demographics.

— Michael Glass is the regional manager of the Cleveland office of Marcus & Millichap Real Estate Investment Services.

Cleveland Office Market

HUNTINGTON BANK SIGNS LEASE WITHIN 45-STORY OFFICE TOWER

Norfolk, Virginia-based Harbor Group International has arranged a lease for approximately 100,000 square feet within 200 Public Square, a 45-story Class A office building located on Euclid Avenue in downtown Cleveland. Huntington Bank has leased office and retail space within the building for a 20-year term. The leased property includes two full atrium levels, a third floor and a retail component. Huntington Bank will relocate its regional headquarters to the facility as early as November 2010, with a completion date of November 2011. Amenities at the 1.27 million-square-foot office tower include a 757-space parking garage, a fitness center and an eight-story atrium. Terms of the lease allow Huntington Bank to add prominent signage to the building, including the top of the tower.

K&D Lands office tenant for Euclid Avenue Corridor Redevelopment

Local developer K&D Group has inked Cleveland’s largest advertising agency, Wyse Advertising, to a 25,000-square-foot, 10-year lease agreement for office space within the renovated 668 Euclid Avenue. K&D is redeveloping the 429,000-square-foot historic building, which was originally home to the William Taylor Son & Co. department store, into a mix of luxury apartments and service retail space. Wyse will be the buildings only commercial tenant, and will occupy space on the buildings ground floor, fronting Euclid Avenue.

The project is part of the ongoing Euclid Avenue Corridor revitalization, adjacent to the East Fourth Street entertainment district. 668 Euclid Avenue includes an 8-story building fronting Euclid and a four-story building fronting Prospect Avenue. The property’s striking 73-foot atrium and 17-foot ceilings will be a major draw for potential residents and tenants.

Cleveland-based Allegro Realty Advisors brokered the lease transaction between K&D Group and Wyse. Tom Mulle of Mulle & Associates, as architect, is working on the project alongside the developer, as is Jim Lawler of Lawler Construction, who represented Wyse in the negotiations. Geoff Coyle of locally based brokerage firm Colliers Ostendorf-Morris is serving as K&D’s listing agent.

Barry Holtzer and Kevin Riley of Colliers O-M also brokered the $8 million acquisition of the building for K&D Group.

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